Report Finds Flow-Through Businesses Essential to U.S. Economy

On the heels of a new report finding that flow-through businesses furnish more than half of the private sector jobs in the U.S., Ways & Means Committee members Dave Reichert (R-WA) and Ron Kind (D-WI) today will introduce the S Corporation Modernization Act of 2011 (H.R. 1478).

The study – released today and authored by Drs. Robert Carroll and Gerald Prante of Ernst & Young LLP – finds that fifty-four percent of all private sector employees (69 million) work for pass-through businesses, and one out of four private sector workers (31 million) is employed by an S corporation. The study also finds that the existence of flow-through businesses,S corporations, partnerships, limited liability companies, and sole proprietorships – results in higher levels of capital investment and employment than if all firms were structured as C corporations.

Despite the vital role flow-through businesses play in the U.S. economy, the Secretary of Treasury has suggested that Congress pursue a budget-neutral, corporate-only approach to tax reform that excludes the 95 percent of businesses organized as something other than C corporations. According to the study, such a reform would raise the tax burden on flow-through businesses by $27 billion per year. The tax hike would most affect the agriculture industry (22 percent), construction industry (nine percent), retailers (nine percent), manufacturing industry (eight percent), and real estate (eight percent).

Drs. Carroll and Prante conclude their report by noting that “tax reform that lowers the corporate tax rate and pays for this change by eliminating all business tax expenditures would have the impact of raising the taxes paid by owners of businesses organized in flow-through form.”

The Reichert-Kind legislation is applauded by the S Corporation Association (S-Corp) as a critical measure to modernize the outdated rules that apply to S corporations. The legislation would make it easier for S corporations to raise capital, invest in new buildings and equipment, and hire new workers. Among other items, the bill would permanently reduce the built-in gains holding period to five years allowing access to S corporations’ own locked-up capital, allow non-resident aliens to invest in S corporations through small business trusts, reduce the negative impact of the so-called sting tax, and encourage charitable giving by S corporations by simplifying related rules.

“S corporations and other similar businesses are responsible for more than half of the jobs in Washington State and across America,” said Rep. Reichert. “As our economy struggles to get back on sound footing, I’m proud that this bipartisan legislation will help these proven job creators access the capital needed to grow, compete, and help get more and more Americans back to work. I remain committed to supporting these bedrocks of our economy by advocating for pro-growth tax policies from my position on the Ways and Means Committee.”

“This bill is a commonsense update to the tax code that will give S corporations the ability to grow and prosper especially in this tough economic environment,” said Rep. Kind. “It is critical that we ease the tax burden on our small and family owned businesses who are driving our economic growth. Under this legislation, S corporations will be better able to access credit, invest in their business, and create the good paying jobs that we need.”

“Tax reform should seek to make the entire U.S. economy more competitive, not just a subset of large corporations,” stated S Corporation Association Executive Director Brian Reardon. “If you’re going to tackle tax reform, it must include both the corporate and individual tax codes in order to assist all employers.”

Reardon added, “in the face of proposals that would make the majority of America’s employers less competitive, the Reichert-Kind legislation presents a realistic set of reforms that would improve the ability of 4.5 million S corporations to access much-needed capital and increase their hiring capabilities.”

About S-CORP

The S Corporation Association (S-CORP) is the only organization in Washington D.C. exclusively devoted to promoting and protecting the interests of America’s 4.5 million S corporations. S-CORP was founded in 1996.